[tptacek]

Banks already do ask for financials and corporate track record. You're required to stake your own credit when your financials are inadequate. You want that to be illegal? It's better than those companies not be able to obtain merchant accounts?

[Silhouette]

Banks already do ask for financials and corporate track record. You're required to stake your own credit when your financials are inadequate.

As far as I can see, those providers who require personal guarantees usually do so as a standard condition for almost any new business. Effectively, they consider everyone's financials to be inadequate.

You want that to be illegal? It's better than those companies not be able to obtain merchant accounts?

Someone would still offer the merchant account services to businesses who could demonstrate a reasonable business plan, because on balance they would make money from doing so. Most new businesses are not, in fact, going to experience a 30% chargeback rate four months after the original sale.

The banks obviously know that, they just want (as usual) to privatise the profits but externalise the risks/losses. I have no problem with prohibiting that kind of predatory behaviour. It's a potentially significant barrier to starting a new business, and with the global economy in its current state, allowing absurdly risk-averse banks to inhibit new businesses is exactly what we shouldn't be doing.

If the banking industry had a track record of assessing its clients responsibly and lending (or not lending) based on the results of those assessments and reasonable assumptions, I would be happy to cut them some slack. But we all know damn well that they aren't doing that. And if governments are going to pressure them just to lend to small businesses, they should certainly pressure them to provide basic services to businesses that are viable without relying on loans as well.

[tptacek]

If someone could make money by offering merchant services to businesses with no credit history, they'd already be doing it. No law requires banks to require personal credit checks for merchant accounts.

[Silhouette]

If someone could make money by offering merchant services to businesses with no credit history, they'd already be doing it.

They are already doing it, every time a new business opens an account with them.

No law requires banks to require personal credit checks for merchant accounts.

I'm not talking about credit checks, I'm talking about a personal guarantee, of the "taking your house" variety.

[tptacek]

If it's possible to build a viable business offering merchant account services backed by absolutely nothing other than the creditworthiness of a brand-new corporation, why is nobody doing that already?

[Silhouette]

Because they don't have to. The negotiating positions are entirely one-sided, and since they command all the power, they can essentially impose arbitrarily harsh terms to any extent the law permits.

[tptacek]

I'm not sure you're following what I'm saying. That's probably my fault, for being terse. Even if the negotiating positions are "entirely one-sided" right now, that position leaves the door open for a competitor to capture market share by offering accounts without personal credit attachments. And yet nobody does that. That suggests one of two things: either (i) you can't capture much market share by offering easy terms for a merchant account (unlikely, to my mind) or (ii) you can't stay in business offering those terms.

[Spooky23]

Why would expose themselves to such obvious fraud?

The personal guarantees go away once your business is a going concern.

[Silhouette]

Sorry, what obvious fraud?

And if the personal guarantees are going to go away once the business is a going concern, there's no problem with writing a shut-off date into the contract to make this explicit from the beginning, is there?

[Spooky23]

You can anonymously acquire a Nevada shelf corporation in a week or two. If you were able to just setup a merchant account without a personal guarantee, you could then trivially rack up a significant volume of fraudulent charges without any recourse. (The bank would literally not know who you are)

If you are a real business, you will almost certainly change credit card processors anyway to get better payment terms as your volume increases. The last startup I worked for changed at least three times as our volume grew.

[joe_littlebiz]

"SQUARE" (square.com) does.

[marshray]

You're begging the false dichotomy here.

Insisting on personal liability for a corporate account is equivalent to denying the account to the corporation.

Bankers would prefer to have you sign away your first born children too (sounds like something out of Dickens). But we've made such practices illegal and there's no evidence that the money supply is suffering for it.

[tptacek]

Help me understand. What you're suggesting is that, simply by having paid a couple hundred bucks to incorporate, regardless of my personal credit, I should be able to establish a merchant account?

[marshray]

Asking to see some personal references and a personal background check is one thing. But requring a 'natural person' to become personally liable for a corporate contract is basically equivalent to denying the corporation.

So maybe the bank is willing to issue the merchant account to the individual with the understanding that it may be used by a corporation. But let's not call it something it isn't.

[tptacek]

You said it earlier: requiring a personal guarantee is indeed the equivalent of denying the account to the corporation. I'm not sure what else there is to talk about, unless you think contracts for merchant accounts should be compulsory.

[Silhouette]

I'm not sure what else there is to talk about, unless you think contracts for merchant accounts should be compulsory.

Completely automatic is obviously silly because of the fraud risk, but a presumption in favour and/or formal restrictions on acceptable criteria for refusal aren't nearly as absurd as you're implying.

We're talking about a very closed industry and a service that, in practice, directly affects people's ability to trade.

We regulate service providers in other essential industries, and they can't deny provision to a customer just because they don't like them. It's part of the deal if you want to operate in those markets.

And there are all kinds of laws to prevent or restrict one-sided deals that inhibit people's ability to trade. There are laws about monopolies and anti-competitive behaviour. The handling of non-compete agreements in employment law would be another obvious example in a slightly different context.

[tptacek]

The "service providers" in those other "essential industries" that can't "deny provision" because they "don't like them" have, as a general rule, been granted monopolies. This is a silly conversation. The system that works the way you seem to want it to is the subject the thread; it's Paypal.

[Silhouette]

No, we're suggesting that if you're going to offer a merchant account to a company, your decision and terms should be based on the nature of that company.

You might reasonably do a credit check on the principals, since someone running a company who has a track record of bad debts is obviously a warning sign. Likewise you can check them against the databases of people who've been kicked off payment services before.

But in the end, you should be looking at whether a company has a credible business plan and people who are likely to execute it well. That's apparently good enough for other major financial transactions, including attracting investors and things like company credit cards for principals on the day you open a bank account. How come everyone else in the world can use common sense and make an informed judgement about risk, but merchant account providers can't?

[tptacek]

Ok, and now the answer to that question is, "No, actuarially, we cannot offer you a merchant account backed only by your corporation." Like I said before. Your response is... what? No merchant account for you?

[marshray]

No, I've outlined two other options:

A. The bank offers a merchant account to a party they feel is worthy with the understanding that this party is going to use the account for the corporation.

B. The bank re-evaluates their criteria for merchant accounts and/or develops new products with which to serve the demand for merchant accounts.

But the status quo seems to me like a situation in which an entrepreneur can't start an honest corporation without putting his kids' college savings at risk of highly unpredictable fraud loss. Unless this person is connected to the right people in finance and banking, of course.

Why shouldn't my local tree-trimmer be able to accept credit cards? Like Greece, imagine the uncaptured tax that results from this sector of the economy dealing instead in mostly cash. I don't think this the current system is optimal or fair.

[Silhouette]

But the status quo seems to me like a situation in which an entrepreneur can't start an honest corporation without putting his kids' college savings at risk of highly unpredictable fraud loss.

And to add insult to injury, that kind of risk is entirely the fault of the payment industry itself, for failing to implement sufficiently robust security measures. And yet, the merchant typically carries the risk, not the payment industry.

Perhaps any compulsory refunds should be classified as either based on fraud or based on dissatisfaction, and the card payment services should be required to indemnify the merchant against fraudulent ones provided that the merchant has followed the recommended security steps before completing the transaction.

In fact, I've noticed recently that a few payment services are offering to eat chargebacks based on claims of fraud if an on-line transaction included a test such as Verified by Visa, so this situation may be starting to change, albeit rather slowly.

For losses based on dissatisfaction, it's probably as fair as anything practical to make the merchant carry the risk, but it is extremely unlikely that this kind of chargeback would result in a sudden spike in refunds a long time after the initial payments. It seems reasonable to handle this case via a level of retained funds commensurate with the observed level of loss.

That really only leaves catastrophe-scale events, such as a product having a fundamental flaw where everything dies at midnight on 1 January 2000. But in that case, either the business has the funds to cover the loss (in which case there's no problem and the card services can go to court if the merchant doesn't pay back what they owe) or the business is toast (in which case unless it's a very small business, probably no individual who gave a personal guarantee could do much to cover the costs anyway, and if it was a very small business, there's no substantial danger to the card service companies on the relatively rare occasions that they have to write the client off and eat the loss themselves).

In short, to the individual a piercing agreement may be an existential threat to their way of life, but such agreements make little real difference to the card companies in cases where the problem is not essentially their fault anyway.

[tptacek]

What does it help that the corporation is going to use the account only for the corporation? How does that cover the bank when the corporation fails to deliver on its promises to customers and then goes bankrupt, leaving the bank on the hook for chargebacks?

[Silhouette]

Ok, and now the answer to that question is, "No, actuarially, we cannot offer you a merchant account backed only by your corporation." Like I said before.

Well, I don't believe that would be the universal answer in most cases, and perhaps where it really is there is a lesson that someone should learn cheaply. But let's assume you're right for the sake of this discussion.

Your response is... what?

That a financial service company with no new clients is not long for the business world.

[tptacek]

This is not a serious argument. It suggests that a simple form of contract between two consenting counterparties should be made unlawful, and then, to get around the fact that this would result in a market where small startups would never be able to get merchant accounts, suggests that the entire payment processing market would either restructure itself or be forced to restructure itself to get around that problem.

No. That's not going to happen. I'll go one further: if you so much as sign your name on a contract the wrong way, for instance by leaving out your title, you can easily create situations in which contracts that individual officers of your company sign bind directly to them; for instance, your VP/Engineering could easily sign a contract with a consulting developer that would leave them personally liable to that consultant if the company went out of business and didn't pay the consultant. The VP/Engineering in that scenario didn't even intend to create a personal attachment, and yet cases like this have been decided against people like that.

Similarly, in some states, payroll obligations --- which are contractual, precisely the type of exposure that limited liability covers --- can automatically pierce corporate liability and bind to the owners of the company.

I think you drastically overestimate the protection afforded by limited liability.